11th; Personal Finance; Credit Basics

Describe why a person is spending future income when using credit.

You're borrowing money you don't have yet but will pay in the future.

Laura is using a rent-to-own store to purchase a computer valued at $1,000. She is paying $25 per week for 104 weeks (2 years). Why might this loan contribute negatively to her financial well-being?

She will be paying $2,600 which is much more than the $1,000 value of the computer.

Refund

Short-term cash advance secured by a taxpayer's expected tax refund.

Payday loan

Short-term loan that provides immediate cash by securing a borrower's written check or receiving authorization for automatic withdrawal from the borrower's depository institution account.

Rent-to-own loan

Tangible items leased with the condition that the item will be owned by the renter if the term of rent (contract) is completed.

Title loan

The borrower gives the lender his/her automobile title in exchange for a set amount of cash.

Annual interest rates for alternative loans can be as high as 300%.

True

Depending on the credit terms, if a person has a late payment, consequences including higher interest rates, may occur.

True

Evaluating the purpose of credit is an important consideration to using credit responsibly.

True

If an individual does not meet the credit terms for a pawn loan, the lender will keep the property.

True

Edward is considering buying a home using credit. What are three questions he should ask himself to ensure he is using credit responsibly?

1) Could he wait and save more money for the purchase? 2) Can he manage the payment along with his other financial responsibilities? 3) How long will he be paying it off?

Jonna is considering using a refund anticipation loan to have money for a deposit on a Caribbean vacation. What are two alternatives she should consider before using this type of credit?

1) Waiting until she has her refund before paying the deposit 2) using savings to pay for the deposit

Drew is considering purchasing a new vehicle. What are three things he should review closely on the contract?

1) actual purchase price 2) term of the loan/monthly fees 3) interest the dealer fees

Provide two examples of when credit, if used responsibly, can be a positive.

1) investing in human capital with educational loans 2) extra money saved for emergencies

Open-end credit

A line of credit established in advance so the borrower does not have to apply for credit each time new credit is desired.

Pawn loan

A loan based on the value of personal property.

Closed-end credit

A loan which the borrower must repay the amount in a specified number of equal payments.

All lenders check a person's credit report and score during the loan approval process.

False

An example of closed-end credit is a secure credit card.

False

The terms of a loan are always consistent for the length of the loan.

False